Pure poison on land tax

Gavin R. Putland offers the
antidote for Sinclair Davidson.

There are many valid arguments which the economic establishment
finds inconvenient but cannot refute, and which it therefore attacks
by obfuscation and diversion. The obfuscators are entitled to the
presumption (although it cannot be true of them all) that they are not
instigators but co-victims, merely teaching what they have been
taught. But that in no way mitigates the damage.

Consider the attack on Steve Keen, a non-establishment
economist who is kicking too many goals for the establishment's
liking, by Rory Robertson of Macquarie Bank. Robertson
ridiculed Keen's focus on
debt-to-GDP ratios by accusing Keen of “the schoolboy error
of comparing debt to income (a stock to a flow — apples to
oranges)”. Presumably the reader isn't meant to notice that
apples and oranges are both stocks. Even if we ignore that
technicality, the argument that you can't divide a stock by a flow
epitomizes the remoteness of mainstream economists from the real
world. A person of more practical bent, such as a plumber or a motor
mechanic or even an applied mathematician, would know that the ratio
of a stock to a corresponding flow has the units of time and is
related to a real-world time, e.g. the time taken to fill the bathtub
(while the flow replenishes the stock) or to empty the fuel tank
(while the stock sustains the flow). But for the reader who is in too
much of a hurry to notice these things, the combination of the jargon
(“a stock to a flow”), the cliché (“apples to
oranges”) and the cheap insult (“schoolboy error”)
will probably be enough to hose down any interest in Keen's work.
It's a form of censorship, accomplished not by gagging the speaker but
by turning away the audience.

Don't get me wrong: Dr Keen's dire predictions may yet turn out to
be overblown. But if they do, it won't be because he compared a stock
to a flow.

The Georgists — those who would finance government
from the economic rent of land and other non-replicable assets, in
lieu of taxes that penalize production and strangle it with red tape
— can sympathize with Dr Keen, having endured similar
treatment for more than a century. As the “global financial
crisis” deepens, the imperative to put down the Georgists has
become acute, partly because the failure of mainstream economics has,
by default, focused attention on the alternatives, and partly because
an embarrassing number of Georgists predicted the crisis years
ago [1,2,3,4], while central bankers
remained in denial until what couldn't happen again had just happened
again.

So something had to be done about Bryan Kavanagh's article
“Breaking in on the rent seekers”, which appeared on the
back page of the Age on March 11, saying in part:

The truth is that the public capture of
publicly generated land rent never does harm to society. To the
contrary, it may be dawning on politicians and analysts that the real
estate bubble was the inevitable result of inadequate land-value
capture. They may even consider extending and fortifying council
rates and state land taxes in order to prevent damaging real estate
bubbles from developing again in the future.

Against the Georgist premise that land is fixed in supply, Davidson
writes:

While land is fixed in geographic
terms, land as an economic asset is not. Land, like capital, can be
allocated from one usage to another.

Note the unjustified substitution of allocation for supply. But
this bait-and-switch doesn't solve Davidson's problem, because if land
owners pay a sufficiently heavy holding tax on their land, they must
allocate it productively in order to cover the tax, or sell it to
someone who will. In either case, absentee owners cannot afford to
hold land for purely speculative purposes; they need to attract paying
tenants, and this need improves the bargaining power of tenants,
making rents more affordable. Meanwhile the pressure to sell land
makes it more affordable for prospective buyers.

If capital is taxed in the same way, one can avoid the tax by
destroying the capital (or not creating it in the first place), thus
reducing production. But when land is taxed in this way, one can only
reallocate it, thus increasing production. Therein lies the
“free lunch” whose existence Davidson denies. Therein
lies the distortion in Davidson's claim that land is an input into
wealth creation “just as any other factor of
production.”

A uniform land-value tax does not inhibit reallocation of land. A
land-value tax with exemptions does not inhibit reallocation between
non-exempt uses. A stamp duty on conveyancing severely inhibits
reallocation because it taxes a change of ownership rather than
a continuation of ownership. But Davidson, for reasons best known to
himself, complains about land tax instead of stamp duty.

Having switched from supply to allocation, Davidson then switches
back by quoting John Bates Clark against the idea “that
land is fixed in amount...” Giving the reader a second chance to
notice the bait-and-switch is clumsy, especially as it could have been
avoided by presenting the arguments in a different order, and
therefore tends to support the presumption that Davidson actually
believes his own bafflegab. Be that as it may, quoting Clark was
obligatory because his 1899 textbook The
Distribution of Wealth, more than any other, established the
neo-classical doctrine that land is a form of capital, wherefore the
rent of land is a form of interest — or, as Davidson's title
puts it, “There is no such thing as geo-rent”.
Prof. Mason Gaffney [5]
describes Clark's
technique as follows:

On p.2, the rent of land is merged with
interest “for reasons
that will appear later”. This begins a kind of “proof
by infinite retreat”. The promised reasons are later put off
again to Chapter XXII, which puts them
off to Chapter XXIV, where they finally disappear in the fine
print of one of the
longest footnotes in history, pp.395–98. Along the way he
repeats his idea that capital is immortal, reprinting earlier works as
chapters. At one point he says rent is interest because it equals the
interest rate times the price of land. Elsewhere he says unearned
increments are really part of the wages of workers who are also
landowners. Device after device is used; deferral after deferral of
promises to treat central matters “later”. Meantime,
however, rent is interest and land is capital throughout the
book.

It's not science (and if you didn't get the joke, look up
“proof by infinite descent”); but it's convenient for
those who wish to undercut the case for a selective tax on land. To
that end, Davidson quotes Clark as saying “The idea that land is
fixed in amount, ..., is really based on an error which one encounters
in economic discussions with wearisome frequency.” Let us put
this quote
back in
context so that we can see what passes for logic in Clark's
definitive text:

Let us see how much, in a static study, these distinctions amount
to. That capital, in the aggregate, should be fixed in amount, is one
of the conditions of the static state. This assumption, moreover,
expresses what is true at any one moment in a dynamic state. The gross
amount of capital in the world cannot be instantly changed, and the
rate of interest at this moment is based on the gross amount existing
at this moment. If dynamic changes were not to occur, the present
amount would be the permanent one, and all capital could be treated,
like land, as a fixed quantity. The idea that land is fixed in amount,
and that capital can be increased at will and to any extent, is really
based on an error which one encounters in economic discussions with
wearisome frequency.

... At any one time, the amount of artificial capital in existence
is as fixed as is the amount of land. Within any short time it is
impossible to increase the general fund of artificial capital enough
to make a perceptible difference in the conditions of social
industry. At any one time we have to deal with a definite quantity of
land, in combination with a definite amount of capital in artificial
forms. Moreover, the distinction between land and other capital-goods,
based on the notion that land cannot be increased and that other
things can be, has obviously no validity in a static study; for the
static assumption itself precludes all increase of capital.

In short, assume away the problem by supposing a static state,
dismiss the inconvenient reality of a dynamic state by taking a static
snapshot, pretend that what cannot be “instantly changed”
might as well be set in stone, and presto! — capital is as
permanent as land. Then complain because the belief that land is
different from capital keeps popping up with “wearisome
frequency”, and don't mention the possibility that the reason
why it won't go away is that it happens to be true. Does anyone not
smell a hired gun?

The definition given for land to make
it fit the description of a fixed supply — the original and
inexhaustible powers of the soil — is indeed drastic in its
limitation. Later, this dogma of unconditional fixity of supply was
made the basis for the single-tax propaganda. We cannot discuss this
position at length, but must take space to remark quite briefly that
it is utterly fallacious. It should be self-evident that when the
discovery, appropriation, and development of new natural resources is
an open, competitive game, there is unlikely to be any difference
between the returns from resources put to this use and those put to
any other.

Unfortunately this “self-evident” proposition has
nothing to do with whether land is fixed in supply. But the reader
who takes the time to be convinced by it, and who is sufficiently
impressed by its truth (and by his/her ability to perceive its truth),
will, with any luck, fail to notice that it doesn't prove what it
pretends to prove. Another red herring is the reference to
“original and inexhaustible powers of the soil”. Nowadays
the value of land depends more on its location than on its soil
quality; but this in no way contradicts fixity of supply. The
pretense that the definition of land must be artificially narrowed
“to make it fit the description of a fixed supply” is
false and highly prejudicial. (Moreover, if we indeed define
land for economic purposes as the factor limited in supply, we find
that this definition is slightly wider than the everyday
meaning. The Georgist literature of Knight's time already placed
natural resources and “public franchises” in the same
category as land.) Similarly prejudicial are the words
“drastic”, “dogma” and
“propaganda” in varying degrees of proximity to
“single-tax”, the then-fashionable description of the
Georgist proposal. It is all well calculated to bypass the reader's
critical faculties at the expense of the Georgists.

Knight's “self-evident” proposition is reminiscent of
another claim often adduced against Georgists, namely that the return
on land is no higher than the return on other assets. This too is a
red herring. The case for a selective tax on land does not
depend on the premise that the return on land, relative to its cost of
acquisition, is abnormally high. It depends rather on the fact that
the return on an asset that can be privately produced (capital) is an
incentive to produce it, while the return on an asset that cannot be
privately produced (land) is not.

Knight defended and elaborated the Clarkian doctrine that capital
is static. Gaffney [op. cit.] explains it
this
way:

Capital, unlike land, has a finite life. It depreciates and is
reproduced. That is, it turns over. The reciprocal of turnover is a
period of time, which the Austrians call a “period of
production”. This was anathema to Clark, who wanted to erase
the difference of land and capital by making capital deathless, like
land, and have capital consist of a mystical essence that could
“transmigrate” into land and explain its value.

Knight took up Clark's anti-Austrian attack with multiplied vigor.
In this context, anti-Austrian means anti-Georgist. ...

... Knight goes so far as to commit the “fallacy of the
disappearing inventory”. According to him, the existence of
capital lets us treat inflow and outflow of goods through inventories
as simultaneous. Likewise we may treat production and consumption as
simultaneous, however long goods are stored up in inventory... The
result of such thinking is to bypass the whole question of what
capital is and does, and, damagingly for George, to erase a primary
distinction of capital from land. Knight uses the point for this very
purpose.

The lost distinction is that capital turns over; it is continuously
being used up and replaced by hiring labour to produce more. The
longer it takes capital to work through the pipeline, the more capital
is required per worker and per unit of output, and the higher is the
ratio of capital to labour. Add to that, the pipeline itself is
capital. Likewise, since pipes occupy space, the more land is
required. To keep the distinction of land and capital well lost, Clark
and Knight were forced to dispute the Austrian capital theory, which
each of them did in their oft-cited debates with, respectively,
Böhm-Bawerk and Hayek. These celebrated exchanges seem quite
tedious and pointless, and even mystical, until one realizes their
essential role in the imperative to slam the lid on Henry George and
his idea of treating land and capital separately. They were
essentially battles of Anti-Georgists vs. Anti-Marxists.

Davidson, like Knight, knows how to use strong language to soften
up his readers for a weak argument. Before the double bait-and-switch
and the quotes from Clark and Knight, Davidson writes:

The early Greeks viewed direct tax on
land as the mark of tyranny. So too do modern taxpayers.

He doesn't explain why we shouldn't regard speculatively inflated
land prices, or the compliance costs of income tax, payroll tax and
GST, as marks of tyranny, or why we shouldn't draw the obvious
inference that modern western civilization might be headed the way of
ancient Greece. But this tactic may help to explain why the geo-rent
tax is attributed solely to Henry George without mentioning its
earlier or later proponents. It would be a bit hard for a
“free-market” think-tank like the IPA to accuse Adam
Smith [6], John Stuart
Mill [7], Winston
Churchill [8], Milton
Friedman [9] and William
F. Buckley Jr. [10,11] of advocating
“tyranny”. But it's easy to pin that charge on Henry
George because his
free-market credentials, although stronger than those of any
right-wing demagogue, are less well known.

When Davidson finally gets around to presenting his core argument,
it comes down to this:

[N]ature does not yield economic
value easily. At any level of economic activity above
hunter-gathering natural produce must be combined with capital,
labour, and entrepreneurial insight before economic value can be
created.

That's half the truth. The other half, which the reader is not
supposed to notice, is that the party who gets the economic value is
not necessarily the one who adds the “capital, labour, and
entrepreneurial insight”. And when the holding tax on land is
too low to offset expected capital gains, why would the owners bother
applying capital, labour and entrepreneurship when they can simply
acquire more land, whose value is increasing due to the capital,
labour and entrepreneurship applied by other parties on
surrounding land?

Davidson's conclusion that a tax on land is a tax on capital or
labour does not follow from any of his earlier assertions. Neither is
it true. From the micro-economic viewpoint, a tax on land does not
rise or fall with the amount of labour or capital applied by the
taxpayer. From the macro-economic viewpoint, the inelasticity of the
supply of land implies that taxes on
capital or labour, together with their deadweight costs, tend to be
shifted onto land. If the same revenue were raised from taxes
levied directly on land, the land owners would actually be better off
because there would be no deadweight. Furthermore, if a government's
revenue is apportioned to land values, that government has the ability
and the incentive to invest in infrastructure that raises land values
for the benefit of the owners. By opposing taxes on land values, the
property lobby and its academic allies frustrate the funding of
projects that would increase returns for property investors. The
hired guns have shot their clients.

* * *

P.S. (March 27): Since this article was posted, Steve Keen
has released a web-friendly version of his recent critique of
neo-classical economics [11a]. He does not address the conflation of
land with capital, but does address the closely related
static-state assumption (which he calls “the obsession with
equilibrium”), saying in part:

The fallacy that dynamic processes must
be modelled as if the system is in continuous equilibrium through time
is probably the most important reason for the intellectual failure of
neoclassical economics.

References

[1] “By 2007, Britain
and most of the other industrially advanced economies will be in the
throes of frenzied activity in the land market to equal what happened
in 1988/89. Land prices will be near their 18-year peak, driven by an
exponential growth rate, on the verge of the collapse that will
presage the global depression of 2010.”
— Fred Harrison, “The Coming
‘Housing’ Crash”, in F.J. Jones &
F. Harrison, The Chaos Makers (London, Othila
Press, 1997).

[2] “The 18-year cycle
in the US and similar cycles in other countries give the geo-Austrian
cycle theory predictive power: the next major bust, 18 years after the
1990 downturn, will be around 2008...” —
Fred E. Foldvary,
“The Business Cycle: a Georgist-Austrian
Synthesis”, American J. of Economics and Sociology
56(4):521–41 (October 1997).

[3] “If the U.S. economy
is shedding jobs,... how does it finance its growing consumption and
rising asset values? By a credit expansion..., backed by assets whose
values are totally dependent on the circular argument that values will
keep increasing. Eventually a major asset market must collapse,
causing a credit contraction and liquidity loss, which reduces demand
for goods and services and causes other asset markets to collapse, and
so on. Worse, as the members of one economic class go bankrupt, they
take down their creditors, who in turn take down more creditors, and
so on, until most of the population has neither sufficient assets nor
sufficient credit to do business. That's a depression. And the U.S.,
as the world's biggest debtor and consumer, cannot sink into
depression without dragging the rest of the world down with it.”
— Gavin R. Putland, letter in the Australian
Financial Review, Sep.10, 2003.

[4] “At the bursting of
each property bubble... the economy has declined into
recession... ...Australians have taken their eyes off the ball. We
began to follow the dictates of the tax regime to play another game
altogether, namely, that of real estate speculation. We have now
inflated the current residential bubble to voluminous proportions and
economic growth is primed to tank into a major deflation...
[T]he next adjustment of Australian interest rates would more properly
be down.” — Bryan Kavanagh,
“Resource rents hold the property key”, The Age,
Jun.15, 2005.

[6] “Both ground-rents
and the ordinary rent of land are a species of revenue which the
owner, in many cases, enjoys without any care or attention of his
own. Though a part of this revenue should be taken from him in order
to defray the expenses of the state, no discouragement will thereby be
given to any sort of industry. The annual produce of the land and
labour of the society, the real wealth and revenue of the great body
of the people, might be the same after such a tax as before.
Ground-rents and the ordinary rent of land are, therefore, perhaps,
the species of revenue which can best bear to have a peculiar tax
imposed upon them.” — Adam Smith, The
Wealth of
Nations, Bk.V, Ch.2, Pt.I, Art.I.

[7] “I see no objection
to declaring that the future increment of rent should be liable to
special taxation; in doing which all injustice to the landlords would
be obviated, if the present market-price of their land were secured to
them; since that includes the present value of all future
expectations. With reference to such a tax, perhaps a safer criterion
than either a rise of rents or a rise of the price of corn, would be a
general rise in the price of land. It would be easy to keep the tax
within the amount which would reduce the market value of land below
the original valuation: and up to that point, whatever the amount of
the tax might be, no injustice would be done to the proprietors.
[§6] But whatever may be thought of the legitimacy of making
the State a sharer in all future increase of rent from natural causes,
the existing land-tax (which in this country unfortunately is very
small) ought not to be regarded as a tax, but as a rent-charge in
favour of the public; a portion of the rent, reserved from the
beginning by the State, which has never belonged to or formed part of
the income of the landlords, and should not therefore be counted to
them as part of their taxation... All who have bought land since the
tax existed have bought it subject to the tax. There is not the
smallest pretence for looking upon it as a payment exacted from the
existing race of landlords. ... The whole of it, therefore,
is not taxation, but a rent-charge, and is as if the state had
retained, not a portion of the rent, but a portion of the land. It is
no more a burthen on the landlord, than the share of one joint tenant
is a burthen on the other.”
— John Stuart Mill, Principles of Political
Economy,
Bk.V, Ch.2.

[8] “Roads are made,
streets are made, railway services are improved, electric light turns
night into day, electric trams glide swiftly to and fro, water is
brought from reservoirs a hundred miles off in the mountains —
and all the while the landlord sits still. Every one of those
improvements is effected by the labour and at the cost of other
people. Many of the most important are effected at the cost of the
municipality and of the ratepayers. To not one of those improvements
does the land monopolist, as a land monopolist, contribute, and yet by
every one of them the value of his land is sensibly enhanced.
... The tax on the increment of land begins by recognising and
franking all past increment. We look only to the future; and for the
future we say only this: that the community shall be the partner in
any further increment above the present value after all the owner's
improvements have been deducted. We say that the State and the
municipality should jointly levy a toll upon the future unearned
increment of the land. A toll of what? Of the whole? No. Of a
half? No. Of a quarter? No. Of a fifth — that is the
proposal of the Budget. And that is robbery, that is plunder, that is
communism and spoliation, that is the social revolution at last, that
is the overturn of civilised society, that is the end of the world
foretold in the Apocalypse! Such is the increment tax about which so
much chatter and outcry are raised at the present time, and upon which
I will say that no more fair, considerate, or salutary proposal for
taxation has ever been made in the House of Commons.”
— Winston Churchill, speech delivered at the King's Theatre (Edinburgh) on July 17,
1909, reported by the Times and reprinted in
Liberalism and the Social Problem (London: Hodder &
Stoughton, 1909).

[9] “In my opinion the
least bad tax is the property tax on the unimproved value of land, the
Henry George argument of many, many years ago.”
— Milton Friedman,
interviewed by the Times Herald (Norristown, PA), Dec.1,
1978.

Caller: I've heard you describe yourself as a Georgist, a
follower of Henry George, but I haven't heard much in having you
promote land value taxation and his theories, and I'm wondering why
that is the case.

William F. Buckley Jr.: It's mostly because
I'm beaten down by my right-wing theorists and intellectual friends.
They always find something wrong with the Single-Tax idea. What I'm
talking about, Mr. Lamb, is Henry George who said there is infinite
capacity to increase capital and to increase labor, but none to
increase land, and since wealth is a function of how they play against
each other, land should be thought of as common property. The effect
of this would be that if you have a parking lot and the Empire State
Building next to it, the tax on the parking lot should be the same as
the tax on the Empire State Building, because you shouldn't encourage
land speculation. Anyway I've run into tons of situations where
I think the Single-Tax theory would be applicable. We should remember
also this about Henry George: he was sort of co-opted by the
socialists in the 20s and the 30s, but he was not one at all. Alfred
J. Nock's book on him makes that plain. Plus, also, he believes in
only that tax. He believes in zero income tax.

(“Alfred” should be “Albert”. It is not
clear whether the error is Buckley's or the transcriber's.)

[11] “Henry George
said that the rent of all land ought to be public... I am sympathetic
with that particular analysis.”
— William F. Buckley Jr.on Firing Line, Public Broadcasting Service, Jan.6,
1980.